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  • L Higgins and S Pettigrove

Out of the Ether: SEC closes file on Ethereum 2.0

Leading Ethereum developer Consensys has announced via a blog post that the Securities and Exchange Commission (SEC) has closed its investigation into the firm only two months after issuing a Wells Notice in relation to its popular MetaMask swaps and staking product. While the SEC’s confirmation was carefully caveated, this decision suggests that the SEC has finally determined not to pursue allegations that the cryptocurrency ETH (the post-merge proof of stake based Ethereum) is a security after months of prevarication by the SEC Chair Gary Gensler.

Way back in June 2018, Director of the Corporation Finance division of the SEC William Hinman declared in a speech that ETH, the native cryptocurrency of the Ethereum network, was not a security. By 2023 however, it appeared that SEC was again seeking to claim jurisdiction over ETH, initiating a sweeping investigation that Consensys argued was a violation of basic due process and would have a chilling effect on innovation.

As the largest Ethereum-based blockchain developer, Consensys decided to bite back by filing a lawsuit against the SEC in April of this year. The lawsuit sought a court order to halt the SEC’s investigation, arguing that ETH is a commodity and thus outside the SEC’s jurisdiction.

According to the blog post, the legal action sparked a wave of concern among policymakers, including members of Congress, and the public at large. Earlier this month Consensys requested the SEC to confirm that the approval of ETH exchange traded funds in May 2024, which was based on the premise of ETH being a commodity, would lead to the closure of its Ethereum 2.0 investigation. The SEC’s Enforcement Division responded affirmatively, notifying Consensys that it is closing its investigation into Ethereum 2.0 and will not pursue an enforcement action against the company.

Alexander Grieve, Goverment Affairs Lead of Paradigm, noted the unusual nature of the SEC's behaviour in a post on X:

Consensys for its part has indicated its intention to continue to pursue its claim for declaratory relief from securities law violations relating to its swap and staking products.

While this decision is a significant victory for Consensys and the broader Ethereum community, it also underscores the urgent need for clear and consistent regulatory guidelines for the crypto industry in the US and the rest of the world. The SEC’s approach of "regulation by enforcement" has been widely criticised for its lack of transparency and predictability, creating an environment of uncertainty that stifles innovation.

While the SEC's decision to close its investigation into Ethereum 2.0 is indeed positive, it is merely a temporary reprieve that underscores the precarious nature of innovation in an industry that is still grappling with significant uncertainty. Here is hoping that this development marks the beginning of a new path forward, which as Consensys has argued gives much-needed regulatory clarity for an industry that serves as the backbone to countless new technologies and innovations.

Written by Luke Higgins and Steven Pettigrove


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